Texas Court: No Prejudice Required to Deny for Late Reporting Under a Claims-Made Policy

shutterstock_246872932This summer in Nicholas Petroleum, Inc. v. Mid-Continent Cas. Co., 2015 WL 4456185, 2015  Tex. App. LEXIS 7489 (Tex.App., Jul. 21, 2015), a Dallas panel of Texas’ intermediate level appellate court rejected policyholder arguments that the insurer was  required to show prejudice before denying coverage under a claims-made policy based on the insured’s untimely reporting of the claim.

Nicholas Petroleum owned and operated a gas station in Dallas, Texas.  Mid-Continent had issued Nicholas a Pollution Liability and Environmental Damage Policy that contained a condition precedent to coverage stating:  “In the event of a Claim under Coverage A, the Insured shall give us written notice as soon as possible but in any event no later than thirty (30) days after receipt of the Claim by the Insured.”  The policy defined “Claim” as “A written demand received by an Insured seeking a remedy and alleging liability or responsibility on the part of an Insured for Loss,” and it defined “Loss” as “monetary awards or settlement of compensatory damages arising from Bodily Injury or Property Damage.”

From May 2006 through July 2008, the Texas Commission on Environmental Quality (“TCEQ”) sent several letters to Nicholas advising of subsurface contamination and requesting that Nicholas make immediate arrangements to determine whether there was any evidence of contamination due to leakage or spillage from the underground tank system at the station.  Additionally, Nicholas received a demand letter from an attorney representing a business next door to the gas station alleging that his client had been damaged when a buyer terminated a contract to purchase the business after discovering contamination that appeared to be leaking from the station’s underground storage tanks.  Ultimately, the next-door business sued Nicholas for damages suffered because of “migration of off-site contamination onto its property.”

Nicholas received letters from the TCEQ on May 10, 2006, August 23, 2006, July 12, 2007, September 12, 2007, February 5, 2008 and July 13, 2008.  Each letter, as well as the petition filed against Nicholas, arguably constituted a “Claim.”  The policyholder notified Mid-Continent of the litigation resulting from contamination on April 10, 2009 (two months after Nicholas contended it received the first “formal” notice of a “release” from the TCEQ and seven months after the suit was filed).  Nicholas conceded that it failed to give notice of the lawsuit within the thirty-day notice provision, but it argued that since notice was given within the policy coverage period, Mid-Continent was required to establish it was prejudiced by the failure to give notice within 30 days before denying coverage.

The Dallas Court of Appeals examined the Texas Supreme Court’s decision in Prodigy Communications Corp. v. Agricultural Excess & Surplus Insurance Co., 288 S.W.3d 374 (Tex. 2009).   In Prodigy, the high court was asked to determine whether the “notice-prejudice rule applies to a claims-made policy when the notice provision requires that the insured, ‘as a condition precedent’ to its rights under the policy, give notice of a claim to its insurer ‘as soon as practicable . . . but in no event later than ninety (90) days after the expiration of the Policy Period or Discovery Period.’ ” The insurer in Prodigy admitted that it was not prejudiced by the delayed notice—which occurred within the 90 day period, but not “as soon as practicable.”  As a result, the Prodigy court’s focus was whether the “as soon as practicable” language within the reporting requirement is an essential part of the bargained-for exchange.  That court concluded that so long as the insured provided notice within the policy period, despite failing to provide notice “as soon as practicable,” an insurer must show prejudice in order to deny coverage.

The Mid-Continent policy required Nicholas to not only provide notice of a claim “as soon as practicable” but also to provide that notice “in any event no later than thirty (30) days after receipt of the claim by the insured.” The court observed that this additional restrictive language was not present in the Prodigy notice provision which required notice within 90 days of the policy’s expiration/discovery period.  Further, the Prodigy opinion did not consider whether an insurer must show prejudice before denying coverage when an insured fails to provide notice under a claims-made policy within the specific time-frame for providing written notice because the insured in Prodigy provided notice within the prescribed period.  The Dallas Court of Appeals upheld Mid-Continent’s motion for summary judgment, finding that the purpose of a claims-the policy is to define the limits of the insurer’s obligation.  Therefore, the Court held when notice is outside the bargained for time period under a claims-made policy, no showing of prejudice is required and there is no coverage.

As of this date, no petition for review with the Texas Supreme Court has been filed by either party. Currently, the Nicholas decision is precedential for trial courts reporting to the Dallas Court of Appeals and confirms that no showing of prejudice is required to decline coverage when an insured fails to provide notice within the prescribed time frame stated in the claims-made policy.

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